Interest rates to remain steady but cuts on the way

Updated
July 02, 2013 08:55:00

The Reserve Bank board is expected to leave the cash rate on hold at 2.75 per cent at today's meeting. However, some economists think the RBA will cut as low as two percent to tame the Australian dollar and to counter a slugglish economy.

TONY EASTLEY: The governor of Australia's Reserve Bank might not have rock star status but almost every word he utters is closely considered and weighed up.

That will be the case today when the RBA board meets to decide whether it's time to cut interest rates again.

I'm joined in the studio by our business editor, Peter Ryan.

Pete good morning, what did most economists think will happen at today's meeting?

PETER RYAN: Well Tony, most believe the cash rate will stay on old at 2.75 per cent, where it's been since May. The official cash rate has fallen by 2 percentage points since late 2011 and the RBA board has signalled it might have scope to cut again if inflation stays in check, and it's currently at 2.5 per cent.

But expectations are the board will wait to see the next set of official inflation figures, which are due at the end of the month.

The RBA governor, Glenn Stevens, will also be heartened at the significant fall in the Australian dollar in recent weeks. This morning it's around 92.3 US cents, but the RBA board might cut again in the coming months to take the dollar below 90 US cents, closer to its long term average of around 85 US cents.

TONY EASTLEY: We still don't know when the election will be held. Is that a factor for the RBA?

PETER RYAN: Well some economists think the RBA could cut as low as 2 per cent by the end of the year, but just when is the big question and they have to take into account current political factors.

Now the RBA has ignored those factors in the past, notably raising rates on Melbourne Cup day, just out from the 2007 election.

But the Macquarie Group's chief economist, Brian Redican, says although the RBA is independent of government, it can't ignore political factors.

BRIAN REDICAN: The Reserve Bank can't be completely impervious to the timing of the election. I think the risk for the Reserve Bank is that the message actually gets drowned out by the campaigning itself and so a rate cut during an election campaign might actually be less effective than if it was done outside of that election campaign.

So, obviously we still don't know when the election will be, so it probably won't affect the RBA's decision, but certainly over the next couple of months, I think it'll be one thing that will enter into the equation about the timing of RBA rate cuts.

TONY EASTLEY: The Macquarie Group's Brian Redican speaking there.

Peter, apart from thinking about the election and taming the dollar of course, does the RBA have anything else to worry about?

PETER RYAN: Well signs that growth in China is slowing is a very big concern and whether that will accelerate the end of the investment phase of the resources boom. Also, retail spending, building approvals and construction remain sluggish, and that could contribute to rising unemployment, which is currently 5.5 per cent.

And all of this could add up to much slower economic growth by the end of the year - around 2 per cent. So, with inflation under control, the RBA might soon find the scope it requires to cut again to underpin the economy.